Financial statement analysis: A data envelopment analysis approach
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Journal of the Operational Research Society (2003) 54, 48-58
?2003 Operational Research Society Ltd. All rights reserved. 0160-5682/03 $15.00
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Financial statementanalysis: A data envelopment analysis approach EH Ferozl*, S Kim2 and RL Raab1 1Universityof Minnesota,Duluth, MN, USA; and 2RutgersUniversity,Camden,NJ, USA, and Singapore ManagementUniversity,Singapore
of a firm.Whileratiosare easy to Ratioanalysisis a commonlyused analyticaltool for verifyingthe performance is problematic, especiallywhentwoormoreratios compute,whichin partexplainstheirwideappeal,theirinterpretation thatis theanalystmust provideconflictingsignals.Indeed,ratioanalysisis oftencriticizedon thegroundsof subjectivity, of a firm. pickandchooseratiosin orderto assessthe overallperformance ratioanalysis.DEA Inthispaperwe demonstrate thatDataEnvelopment Analysis(DEA)canaugmentthetraditional oroperational canprovidea consistentandreliablemeasureof managerial efficiencyof a firm.Wetestthenullhypothesis of a firm.Our betweenDEAandtraditional thatthereis no relationship accountingratiosas measuresof performance to analyststhatis additionalto that resultsrejectthe null hypothesisindicatingthatDEA can provideinformation how financial ratioanalysis.We also applyDEA to the oil and gas industryto demonstrate providedby traditional to ratioanalysis. analystscan employDEAas a complement
Journal of the OperationalResearch Society (2003) 54, 48-58. doi:10.1057/palgrave.jors.2601475
dataenvelopment analysis;finance Keywords:accounting;
Introduction Financialanalysts commonly use ratio analysis to measure the performance of firms. Finance and accounting texts devote a section to ratio analysis as a summaryof accumulated knowledge necessary for the preparationof financial statementsthatare designedto reportthe performanceof the entities to the stakeholders.During the late 1970s and early 1980s, the methodology of ratio analysis was considered suspect, especially by the advocates of the strong form of the efficientmarkethypothesis.However,in the wake of the stock market crash of 1987, the level of faith in the informationalefficiency of the market waned, and ratio analysisagain seemed to gain groundin academicliterature.
*Correspondence:EH Feroz, 137 School of Business and Economics, University of Minnesota, Duluth, 412 Library Drive, Duluth, MN 55812-2496, USA.
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